The Paradigm Shift in Shipper-Carrier Freight Rate Negotiations

American Shipper released a new study on Freight Procurement Strategies on June 29, 2011. The study was sponsored by JDA. The results were based on research conducted in May of this year. Data was gathered from over 300 shippers in the manufacturing and retail sectors. Here are some of the key findings.

Freight Costs are on the Rise

Fifty-eight percent of the study participants indicated that their freight costs increased by over 5% in 2011. This compares to 48% in 2010 and 25% in 2009. Seventeen percent experienced a rate increase of less than five percent in 2011 while the comparable figures for 2010 and 2009 were 15 and 12%. The rest of the sample experienced no increase or a decrease in rates. Forty percent agreed to an increase of over 5% on their contract rates in 2011. This compared to 46 and 10% in 2010 and 2009 respectively. Thirty-one percent accepted a rate increase of less than 5% on their contracted rates this year as compared to 17 and 14% for the years 2010 and 2009 respectively.

More Protracted Rate Negotiations

This year rate negotiations are being extended over a longer period of time. Fifty-three percent of the respondents indicated that in 2011 their freight negotiations were completed in less than two months. In 2010 and 2009, the comparable figures were 63 and 70% respectively. Forty-four percent of the sample reported that their negations took 3 to 6 months this year. This compared to 32 and 27% respectively for 2010 and 2009.

Service and Price Become Equally Important

In 2010 Price was ranked the most important element of the bid as compared to 37% for Service. In 2009, the percentages were 63% Price and 27% Service. In 2011, the percentage split is 48% Price and 49% Service.

Centralizing Freight Negotiations Keeps Rate Increases in Check

This segment of the study produced some interesting results. For companies that centralize freight procurement, 10% experienced a rate increase of 10% or more as compared to 23% of decentralized companies. Similarly, 26% of centralized buyers negotiated a rate increase of 5 to 10% as compared to 34% of decentralized purchasers. Clearly, the opportunity to leverage a company’s total freight spend is paying dividends when it comes to controlling freight costs. A centralized approach also improves visibility and carrier compliance, two important elements in controlling freight costs.

Limited Change in Transportation Technology

While the rate negotiation period and the size of the rate increase may have changed over the past couple of years, the technology platform has not. Forty percent of the respondents still use manual processes or spreadsheets to conduct their freight bids. About 27% are using an automated tool. Furthermore, 67% have no plans to automate. This is the same percentage as last year. Only 13% have automation in their budget for the next year. The biggest drivers for adoption are improved data management, efficiency, save time on procurement and achieve lower freight rates.

Over the past few weeks, a number of carriers have signalled their intent to secure rate increases. Despite the mid year economic slowdown, there appears to be momentum to maintain the trajectory of increasing freight rates.